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1. Direct material
Direct Material consists of the raw material used in a product and some components which are incorporated into the finished product. In other words, it is the material that becomes a part of the product and the costs of which can be directly charged as part of the prime cost. The cost of direct material consumed in a specific period is arrived at as under -
Cost of direct material = Opening stock + purchases - closing stock
If some transport charges are paid on the material purchase then these charges are added to the value of material bought. The returns of material purchased to the suppliers are deducted from the cost of material purchases.
2. Direct Wages
Direct wages are the remuneration paid to factory workers for converting the raw material into finished goods. Other examples of direct wages are remuneration of construction workers, machine operators etc. Direct wages are also called as direct labour cost. This cost can be directly charged to the production of some specific output and it is part of the prime cost.
3. Direct Expenses
Direct expenses include any expenditure other than direct material and direct wages incurred on the production of some specific product. Examples of direct expenses are hire charges of equipment for the production of a specific product, costs of designs or drawings, royalties paid per unit for a copyright design etc.
4. Prime Cost
Prime cost of a product is the total of its direct costs. It is expressed as under:- Prime cost = Direct material cost + Direct labour cost + Direct expenses (if any) .
5. Indirect costs are those costs which cannot be identified to the production of any specific product. These indirect costs are known as overheads.
Overheads may be classified as under:-
(i) Production or factory overheads
(ii) Administration overheads
(iii) Selling and distribution overheads
Wilfykil answered the question on April 15, 2019 at 09:14